Understanding the U.S. Trade Deficit

In January 2015, the U.S. Department of Commerce released figures indicating that the trade deficit fell considerably in November 2014. This is regarded as good news by economists and has been attributed in large part to the increased production of domestic oil and the consequent reduction in oil imports from foreign sources. Some economic experts, however, question the importance of the trade deficit as a factor in the global economy. Understanding this issue can help legal and financial professionals in analyzing current conditions and creating projections regarding international trade and economic growth.

What Is a Trade Deficit?

Simply put, trade deficits occur when a nation imports items of greater financial value than it exports. This is perceived as an outflow of currency from the nation experiencing the trade deficit. Traditionally, trade deficits have been regarded as a sign of economic weakness in the global economic community. With the advent of trade in services, however, it has become increasingly difficult to measure the exact financial worth of exports and imports. This has led some economists to downgrade the importance of trade deficits as a useful measure of a nation’s fiscal health.

The Increasing Internationalism of Trade

Another factor that may affect the importance of trade deficits is the increasingly common practice of importing parts for use in manufacturing operations that then produce goods for export. Many companies maintain offices and factories in multiple countries and transfer materials among these locations on a regular basis. Determining when and if these exports and imports should be counted as part of the balance of trade can be a challenging undertaking even for experienced analysts. As corporations continue to expand their operations across country borders, this process is likely to become even more complex.

The Rise of North American Oil

For those who still consider trade balances an important economic indicator, the development of the Bakken formation and other oilfields in the U.S. and Canada provides a welcome ray of hope in an otherwise uninspiring financial landscape. The increased production of crude oil domestically has allowed the U.S. to reduce its energy imports to a significant degree and has led to lower oil prices worldwide. Lower fuel prices typically reduce the cost of transportation for domestic goods and may lead to greater profitability for manufacturers and retail companies.

The Personal Impact of Imports

Although trade deficits may not be the unmitigated evil portrayed by some media outlets, excessive imports can have a serious negative effect on workers in the U.S. Importing items from countries with substantially lower wage rates can undercut the ability of companies in this country to compete effectively. As a result, businesses may offshore or outsource their manufacturing operations to other countries in an effort to cut costs. This can reduce the number of jobs available in the U.S. and may be a contributing factor in the disappearance of the American middle class.

Are trade deficits still important in the global economic arena? There is no simple answer to this question. It is certain that cheap imports from overseas have taken a toll on the U.S. job market. Overall, however, trade deficits are only one factor in an expansive array of indicators that can be used to determine the health of the American economy.

About The Author

Owen’s experience comprises 20+ years of web and technology sales, deployments, project management and business development. Currently, he is President of Murray Owen LLC, where he provides freelance WordPress development services and website search marketing audits/implementations. He has a BA in Philosophy and Economics.

About RN

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